The dynamics of buy to let investment is changing – here’s how to make sure you continue to invest successfully.
Since 2000, there have been three significant changes to buy to let investment:
1. Price and rental inflation has become very ‘individual’ to a particular property type on a specific street
2. The rules and regulations to let a property have increased costs for landlords
3. Taxes for landlords are rising.
Although each of these changes has had a negative impact on how much buy to let can deliver as an investment, that doesn’t mean property can’t still deliver a great return, especially when compared to other investments, such as stocks and shares.
For example, in December 1999 the FTSE 100 stood at 6,930 points and in July 2016, 17 years later, it was actually lower, at 6,669 points. Obviously, you also secure dividends when you invest in shares and due to ups and downs could have made money from the stock market over the intervening years, but these figures do sit in stark contrast to the average property price, which, according to the new government UK House Price Index, was £75,000 in December 1999 and has reached £224,700 today.
However, as ever when it comes to property, the devil is in the detail and financial success in buy to let depends heavily on the type of investment property you own, what you paid for it and where it’s located.
Price and rental inflation
Although average UK property prices have performed well over the past decade and a half, growth can vary wildly from one area to another and even street to street in the same city. For example, a detached house in West Bridgford, Nottingham, has increased from £124,438 in 2000 to £325,517 in 2016, whereas one flat in the City centre on Parkgate was bought for £120,000 in 2000 and sold for just £140,000 in January 2016.
Although we don’t have rents running back to 2000, we do know that since 2008, the average in Nottinghamshire has changed from £574 per month in 2008 to £585 so far in 2016, just an £11 or 2% increase in eight years. In comparison, rents in Bedfordshire have risen from an average of £679 to £750 per month over the same period, an increase of £71 or 10%.
So for some landlords, prices and rents have seen a good level of growth while, for others who bought the wrong property in the wrong place, prices and rents may have remained very similar. When you add in the effect of inflation, some landlords could actually have suffered negative growth.
Increased costs due to regulation
As the level of legislation governing rented property has increased, landlords have had to pay out more and more money to make sure their property is let legally. This includes money for gas safety checks, energy performance certificates, fire safety, deposit protection and landlord licensing. The introduction of these additional safety measures, as well as higher court fees for evicting a tenant, has cost may landlords hundreds and sometimes thousands of pounds extra a year.
Of course, the positive aspect is that keeping a property maintained to a high level in this way not only helps to ensure you are letting safely to your tenants, but also means your property is likely to be in a good condition and therefore able to secure the highest valuation possible. That’s particularly useful if you’re remortgaging at any stage, as it can enable you to secure a better interest rate.
So there is a definite upside to making sure your property is in top notch condition.
Tax increases
To date, all this includes is landlords having to absorb a 3% increase in stamp duty since April 2016, but there are more tax increases to come. Firstly, anyone who is a higher-rate taxpayer will be affected by the changes to mortgage interest relief planned for April 2017. Then there is what seems to be a ‘penalty’ for those who choose to invest in property, with an 8% reduction in capital gains charges for all other types of investment. For buy to let, capital gains charges will remain at 18% for lower rate taxpayers and 28% for higher-rate taxpayers, while they fall to 10% and 20% respectively for other investments, such as stocks and shares.
How do you still make buy to let investment deliver?
Most investments are likely to experience ups and downs, partly depending on whether the government of the day wants to support or discourage that type of investment. But as long as you understand and stick to the key principles of buy to let – research well and secure and let property appropriately and professionally – you can still generate good net returns.
Key buy to let principles
Firstly, don’t simply rely on ‘natural’ capital growth; try to build in extra equity from the start. You could secure a property at a discount, buy something you can add value to through renovation or extension, or even buy land and build from scratch – these are all ways of gaining a 20-30% increase in capital gains from the day a property is ready to let legally.
Secondly, it’s essential you have the right team to support you. That’s the right financial and legal professional advisors, a service that ensures you keep up to date with all the rules and regulations and a team of contractors and tradespeople that you can call on to keep your property in good condition and legally let. You can either put this team together yourself if you’re confident you have the right knowledge or work with an agent such as Belvoir Lettings who is a member of ARLA, Safeagent or RICS.
Thirdly, you need to have a system for tracking the financial performance of your property investment and should take financial advice every 6-12 months to review your mortgage deals, overall financial situation and plans for the future, such as retirement.
With the changes in taxation over the next few years, make sure you understand the impact on your property portfolio and do what you can to ensure you are paying the right level of tax. For example, it might be advisable to consider buying more properties via a company to help to retain mortgage interest relief for the future.
Whatever the changes to buy to let investment, there are so many ways of making money from property, which it is definitely worth pursuing – at the moment, though, landlords need to make sure they are investing in the best way possible to secure the returns available.
If you would like some help making sure your property portfolio will continue to deliver the returns you need, contact your local Belvoir buy to let expert by clicking here.
